Asia

Chit funds in India

One for the kitty

Nov 2nd 2012, 13:20by S.A. | CHENGALPATTU

ON THE tenth of every month, Lakshmi Ravichandran meets up with a dozen of her neighbours in Chengalpattu, a small town in the South Indian state of Tamil Nadu, to pick one of their names out of a bag. Each time, the women have a kitty into which each member has put 100 rupees (about $2). Whoever’s name is picked gets the lot and then everyone puts in 100 rupees towards next month. They will do this for 13 months, until everyone has had their turn at “winning” (each participant can only do so once). Ms Ravichandran, who earns 3,350 rupees a month as a primary school assistant (pictured to the right, on the job), is using the scheme to cover a chunk of her daughter’s school fees.

The chit fund, or “kitty party” as it is commonly called, is an informal savings group popular among Indian women, particularly in the south. It can be a raffle-like system, as is the case with Ms Ravichandran’s group, or an auction, in which members bid for the discount they are prepared to accept on the pot, to decide who gets the money each month. Such groups are found in most developing countries—in some African countries, they are called “merry-go-rounds”. But India is widely thought to be the only country where large private companies also run formal chit funds.

India’s chit-fund association estimates that the country has 15,000 kitty-party companies which together manage billions of dollars’ worth of funds. Shriram Capital, one of the largest players, operates in four southern states and manages over $800m.Some hope that recent hiccups in India’s once-booming microfinance sector, whose rise was led by microcredit, could bring even more business their way.

India’s microcredit scene has taken a dive since a political and regulatory backlash in late 2010, which centred on accusations that debt-collectors were intimidating borrowers. New loans dropped by almost 40% in value during the past fiscal year, according to the Microfinance Institutions Network, a national self-regulation project. Chit funds, which rely more on pooling the poor’s savings than on lending, might thus now have more appeal. One adviser to microfinance groups in Mumbai, the nation’s commercial capital, says private-equity investors are starting to mention kitty parties as an alternative. He adds that such investors are already keen on India’s gold-loan companies, which are similar to pawn shops and popular among the less well-off.

Chit-fund executives say their schemes are more trustworthy than the informal groups. Ms Ravichandran and her friends say that, in their ad hoc clubs, the appointed leader sometimes makes off with the kitty. Even an honest leader takes the first month’s pot as a handling fee. Chit-fund regulations cap a company’s commission at 5%. Yet the private groups add that only high-value schemes are viable under such curbs, making them less inclined to serve small-time savers in remote areas. “I’m in the private sector. We can’t make [losses],” says R. Chandrasekar, who runs Shriram Capital’s chit funds in Tamil Nadu. His smallest schemes involve 50 people contributing 1,000 rupees each per month. Poorer rural women might use kitty parties to pay for bus tickets and school fees, but their rich counterparts put in 10,000 rupees a month and spend their windfalls on jewellery.

Tight rules can be justified by the chit-fund industry’s history of scams and collapses. India’s regulators are keen to crack down on a host of dodgy schemes concentrated in the state of West Bengal, where a parent company runs an unregistered chit fund and uses the deposits to bankroll its other projects temporarily (as reported in the Indian Express). Preethi Rao at the Institute for Financial Management and Research, an Indian business school in Chennai, adds that some funds conduct only weak background checks on participants, who may stop contributing after they win. Anonymous formal schemes lack the sense of neighbourly obligation that Ms Ravichandran likes. “This way, I am forced to save,” she says. “If the money is at home, I will just grab it.”